Remember the ‘third way’? It promised to find a path between laissez-faire capitalism and the dead hand of the planned economy. Even at the time in the early 90s it had a defensive air, as though the left were simply retreating following the fall of the Berlin wall. And it had an obscurantist quality too, it seemed to be hard to explain and harder yet to understand. Yet, after the last few weeks it’s time to revisit it.
Now the shock impact of the financial crisis is maturing into a deep economic bruise, where the ‘real economy’ of jobs and businesses are affected. And the crisis will also have a lasting political impact too. There will be huge questions to be answered about the role of the state in the market, and the social responsibilities that the market owes for the support it demands. But before that, how has the political landscape already changed over the last week?
First, regulation will no longer be seen as a pure burden on business, but rather as a spectrum on which the right point has to be found. The pervasive language of ‘red tape’ carries the idea that all regulations are a tax on enterprise and that the best amount of regulation is zero. This has always been a nonsense. The very genesis of the market is as a place where weights and measures are assured, where competition is enforced by transparency, where traders are gathered and can be found again if there’s a problem with their merchandise.
The code of Hammurabi, 4,000 years ago, focuses largely on commercial practices, with a few exciting deviations into adultery and other human dramas. The rehabilitation of regulation is a political seachange. Those, like the mayor of London and Digby Jones, warning against ‘more’ regulation, as if regulation was like cabbages and sold by the pound, are out of date. The argument is about smart regulation and transparency that protects individuals.
Second, the age of big government being over? Well that’s over. Corporations and the super-rich have been accustomed to talking about nations as they would hotels during a slow season. ‘If you make me the right offer, I’ll consider lodging there’. The economic expansion that has just ended has been one of floating wealth. Companies would, if they could, have located on floating platforms that could be moved between jurisdictions, shopping for perks and ever lower taxes. Super-rich individuals actually could skip between island tax havens, or buy a berth on a permanent cruise of the tax-free, high seas. After the credit crunch, competitive tax regimes aren’t dead, but there is now an additional dynamic in play. Previously, companies were financially competing for the bottom on tax and regulation. That meant that a single country could lower the bar in a game of fiscal limbo-dancing. But now, there are clear corporate advantages in being based in an ‘economic great power’ like Britain rather than, say, Iceland. This argument is already surfacing in clashes between Labour and the SNP in Scotland. So, the question for the government is, what is the extent of this new sway, and how best to use it?
Third, the age of the government playing a minimal role in the economy is clearly over. But what are the new terms for this? Which industries are in and out of the charmed circle that demands state support? Banking, rail and agriculture are clearly in. We know that mining, Christmas clubs and textiles are out. But where’s the line? If the economic crisis threatens airways or utilities? Who is allowed to go bust? And then, if the state is the ultimate guarantor of part of the economy, then what are the conditions for that license? All those public pounds rushing through the breech in the market will require a public debate on their use.
Fourth, charity. Wasn’t the voluntary sector going to be the future of so many public services? Iain Duncan Smith, to whom the Conservative leadership seems to have outsourced social policy, has bet all his chips on the charitable and faith worlds to tackle welfare. He put all his hope in faith and charity. How resilient will the donation base be during the downturn?
Fifth, and finally, what does this mean for politics? For the last decade and more, we have lived in a triumphant market age where the market has become the master-metaphor for human activity. Public sector bodies write ‘business plans’ and talk of their ‘customers’. The frontier between the market and the state was deep within the public services. The question was how far the public services, and indeed the government itself, should be run like a business? The answer, from both left and right, seemed to move year by year towards the market. But now the frontier has flipped and is suddenly deep with the innermost citadel of the market, where the state is working out its control over banking. Of course, no one is even suggesting running the banks as nationalised industries. But what is lost is the triumphalist assumption that the business-like way is the natural, normal way to run everything, and that anything else is a distortion that should be minimised.
So, the right has lost a pearl beyond price: a political destination. Ideological and movement conservatives had a destination that they were working towards: the residual state and the triumphant private sector. By contrast, the left seem to have no compelling end destination of its own, beyond a very worthy amelioration and the softening of the market. Now, like the left after 1989, the right has lost its destination. That doesn’t mean it is dead, but it has some urgent thinking to do.
Political certainties have been overturned by this financial tsunami. Old certainties and settlements are lying strewn across the beach. The question is what comes next? There are some natural advantages for the left, particularly a renewed appetite for public services as a means of solidarity and the socialisation of risk, across society. And there are potential pitfalls too. Following the bail-out of the banks, which minister could relish telling a delegation of public sector workers that their salary simply can’t be increased? Similarly, the urge to control city bonuses must not be vengeful but in the spirit of making them transparent rewards for excellence, rather than things handed out in a cosy club. After all, few begrudge Warren Buffet his incredible wealth; it’s the payouts for failure that rankle. Also, in the problem pile is pensions. Labour privatised the risk of retirement to the individual at a time of house price inflation and confident stock markets. That looks far from sustainable as the whole solution now.
But above any of these challenges, beyond the challenges of incumbency, beyond any challenges posed by the opposition, the government has to do one thing. It has to give an account of how its economic third way, with its agile co-operation between the state and markets, can deliver aspiration and wealth as well as security.
The golden promise of laissez-faire was always that wealth was created at the top. Labour needs to show how it can support value creation from entrepreneurs on the ground. That means getting the lending markets moving again, so people can build and maintain businesses. If the banks won’t do that sufficiently, Labour could look at encouraging a new wave of modern mutuals and cooperatives. The government could also look at radical new startup zones around research universities, where it creates a tax, finance and planning regime to encourage knowledge-based start-ups. It needs to make the case for targeted infrastructure development during this time – rather than freezing it. If Cross Rail and other developments will add capacity to the economy, we must pursue them. But far more important that any particular policy is that they together add up to a promise of wealth creation, springing from the talents of the British people.
After last week, the job of the left is no longer just to stand outside the market and to compensate for its failures. The market had become an inhuman abstraction that was in danger of delivering rewards for corporate failure, but too little reward for ordinary hard work. No one wants screeds of unnecessary regulation to run through the market. But we can demand that a simple thread of fairness runs through it. So people can work hard, nurture their skills and retire comfortable. And so that the entrepreneur running or starting a business can access modest capital.